We at PricewaterhouseCoopers LLP appreciate the opportunity to comment on the Commission's Proposed Rule: Disclosure in Management's Discussion and Analysis About the Application of Critical Accounting Policies (the "proposal(s)" or the "proposed rule(s)").

Overall Comments

We support the Commission's overarching goals to enhance the transparency surrounding critical accounting policies and estimates and shed light on those policies involving the application of significant judgments on the part of management. However, we are concerned that the proposed rules will result in MD&A disclosures that may become less understandable and valuable, especially to the average investor.

In addition, we believe that the potential impact of this proposal on preparers and readers needs to be evaluated based upon its potential compounded effect. Our concern is that, when taken together with the impacts of other pending rule proposals, especially the proposal to accelerate filing deadlines, this far-reaching expansion of MD&A could become a detractor from the comprehensibility of financial reports. We believe this might happen because, in coping with the need to close the books and report faster, registrants may well become focused on the goal of containing their liability by including large volumes of raw uninterpreted data, and will not spend the time required to condense, analyze and summarize the data to make it more understandable.

We do, however, support Commission efforts to more scrupulously enforce existing S-K 303/MD&A and related FRP requirements surrounding such disclosures. A revised MD&A interpretive release and one or more surgically placed SABs or FRPs could achieve the desired effects without sacrificing the understandability of financial reports.

For example, an expanded interpretation of the existing S-K 303 disclosures surrounding known events, trends and uncertainties to encompass accounting estimates having a calculable effect, perhaps measured under Rule 1-02 of Regulation S-X, would express forcibly the Commission's focus on judgmental items, but retain the emphasis of the disclosure on the entire business and its results, using commonly understood materiality measures. Correlating the MD&A disclosure to SoP 94-6 would leave little doubt in preparers minds what the disclosure threshold would be and would likely place the disclosures in the financial statements, where they belong and where they would be subjected to auditing procedures under GAAS.

We suggest that the Commission and the profession jointly address the "drivers" of a registrant's business through improved disclosures in the financial statements and through MD&A, as well as promote the development of key performance indicators. We believe it would be a wiser use of all our efforts to attempt to elicit that information which is useful to understand "the business" rather than to be involved in voluminous disclosures of variations in individual line-item estimates.

Information Overload

By the Commission's own examples, it seems clear to us that the proposal would add, on average, five pages to an existing MD&A. Containing that expansion to just five pages assumes that only five critical estimates are identified and that initial accounting policy adoption disclosures are minimal.

Based upon the way the proposal is drafted, and the current reporting environment in which scrutiny of management is at an all-time high, there is a built-in incentive for preparers to be expansive, not concise, in their explanations. They will justifiably believe that they need to attempt to support the reasonableness of their judgments surrounding critical estimates in print. They will also fear, as we do, that this release, applied retrospectively could result in questioning of many of their past judgments. Their likely reaction to the risk of being challenged will be to increase the volume of detailed information presented in the belief that it will appear more credible based on its volume.

As we indicated in our response to the rule proposal regarding deadline acceleration, we believe that the market wants, and investors are in the long-run better served by, the continuous and consistent delivery of credible, high-quality information on which to base investment decisions. A proposal that could result in the production of increasing volumes of boiler-plated financial disclosures, designed to contain issuer liability rather than to inform, does not meet the Commission's or our stated goals of achieving transparency concurrently with understandability.

Implementation

As drafted, the proposed rules leave many unanswered questions as to definitions and create new terminology, which may not be generally understood by preparers. Certain key questions, such as how to practically limit the number of critical estimates to be commented upon to a stated number, are taken as stipulations in the proposal. The application to segment disclosures is also left unclear.

We note that the data being sought is quite similar to that required in the "1934 Act Guides, especially Industry Guides 3 and 6. Often the Guide data is displayed in tabular format without much in the way of discussion. However, such data does focus on the effects of certain key factors, such as interest rate sensitivity, on the registrant as a whole, rather than on effects of such changes on individual line items or estimates. We believe that it would better serve readers and investors were the SEC to enhance and enforce the Guides. The SEC should enforce a requirement for discussion of the critical factors that could impact the registrant's overall financial results, rather than dissecting estimates and assumptions related to individual accounts.

Accordingly, we believe the rule should be revised and re-exposed for comment containing understandable criteria for inclusion of disclosures.

If the SEC believes that principles-based standards are worth pursuing in accounting standard-setting in general, the focus on particular estimates rather than the registrant as a whole in this rule proposal, does not seem to reflect a similar belief as to non-financial statement disclosures.

Auditor Involvement

We note that the current auditing standard that deals with reviews and examinations of the entirety of MD&A (AT 701) would need to be amended to allow for some modified form of reporting on only a portion of MD&A. We do not support the concept of examining only a portion of MD&A.

Overall, auditors are in a position to perform MD&A examination services and they are potentially valuable services. However, we believe the focus of the Commission's efforts should be to enhance investor understanding of critical items affecting the "business". Reporting on just the accounting estimates is not consistent with MD&A's overall goals.

We could support auditor involvement under the proposed rules, but only if the examination or review services were applied to the entirety of MD&A as contemplated by AT 701, and only if an adequate separation of auditor responsibility could be made between historical data that could be examined on a traditional basis and that which is effectively projection data (i.e., based on stipulated assumptions about future events) which is being introduced into MD&A as a result of the proposed rules. In addition, a specific auditor safe-harbor should cover any involvement or association with prospective financial data.

We and several other firms have followed up on the examples forming the basis for Footnote 104 of the rule proposal and have found the portrayal of the extent of such reviews to be overstated. We have communicated our findings through the AICPA's SEC Regulations Committee, under separate cover, to the Office of the Chief Accountant.

Potential Undermining of Other Initiatives

We believe:

The rule proposal appears to be in conflict with the principles of FR-59, ASR No. 142 (FRP 202.01-.04) and the Staff Training Manual (Topic Eight), in that it calls for disclosure of a range of alternate outcomes under different assumptions resulting from the application of critical estimates. The publication of such alternate measures of outcomes seems to us to potentially undermine the SEC's initiatives to limit alternate measures of performance and will create a menu of potential adjustments and encourage the calculation not of an alternate net income amount, but potentially dozens. Current SEC rulemaking should not be encouraging the development of even more varied and variable forms of de facto pro forma earnings data.

The proposal undermines the justification concept contained in APB Opinion No. 20, in that it requires expanded discussion of alternate accounting principles after the justification and preferability concepts of that standard have been applied by registrants and their auditors, presumably in good faith.

The proposal also undermines the concept of APB Opinion No. 22, in that, when considered cumulatively with FR-60 and FR-61, it creates a multi-tiered structure of relative importance of accounting policies, leaving the reader with the impression that the basic financial statements may be deficient in an overall sense because, as to accounting policies, unless supplemented by MD&A disclosures, the financial statement footnotes are incomplete. If the proposal is finalized as written, financial reports would now have accounting policies that are "significant" under APB 22, "critical" under FR-60/61 and some subset of those that involve either "critical accounting estimates" or the selection of new accounting principles (involving disclosure beyond that already required by APB 20 as to justification and effects) under the current proposal (33-8098).

Other Risks & Industry Issues

In addition to the creation of additional measures of performance, the proposal calls for a three-year retrospective commentary on the reasons for and effects of any material changes in critical estimates. We believe that driving the disclosure requirement down to the line item level, without linking the requirement for disclosure to the overall results of the business, using net income or other appropriate indicators of operating results to dictate when disclosures are necessary is not appropriate, because it will materially increase the volume of disclosure without any guarantee of getting to the matters that are the "drivers" of the business.

In addition, the need to describe changes that had an impact on "financial performance" creates an uncertain measurement yardstick as well as makes registrants and their auditors potential litigation targets. Virtually any incremental disclosures of estimate changes made by a company whose share price has fallen in the past three years, will entice the plaintiffs' bar into commencing legal actions.

The sensitivity analysis and estimate change requirements pose two types of risks that we are concerned about:

The first relates to the generation of the range of outcomes. We believe that the process to select the ranges may be subject to abuse because preparers will want to be seen as having applied judgments that are "middle of the road" positions. One way to promote that notion is to describe the ends of the range as neatly bracketing the estimate currently in use, potentially making the objective of adding to investor understanding a zero-sum game.

Utilizing reasonably possible near term changes as the basis for the sensitivity analysis introduces "projection" data and multiple assumption interplay into the MD&A. The SEC has always demanded a higher standard when PFI is included in documents, requiring that the "forecast" standard be met, and registrants determine a single most likely outcome relative to the predicted event.

Before the Commission requires new disclosures without regard as to whether they were "material" under the standards in place at the time such estimates were made or changed, it should further justify the need for such disclosures by studying whether this type of disclosure could have possibly afforded investors protection from the types of reporting debacles we have all recently witnessed.

With respect to expanded discussions of certain types of estimated liabilities, such as for taxes and litigation settlements, we believe the public disclosure of the details of the estimation process and ends of the range of estimates may seriously damage a registrant's negotiating position. The Commission recently, and wisely, deferred further consideration of a rule proposal (33-7793) related to supplementary information about liabilities and reserves reported pursuant to Rule 12-09 of Regulation S-X because of the damaging effects such disclosures may have on registrants and their shareholders.

For the same reasons, we believe the current proposal should exclude such accounts from discussion. Although difficult to define the necessary exclusionary language, it is also apparent to us from our consideration of the proposal, that in some industries the estimation methodologies and key assumptions used are themselves in the nature of a trade secret which creates competitive advantage in the marketplace (e.g., a unique actuarial estimation approach or inputs that allows an insurer to price a product more aggressively than a competitor).

We also note that in the insurance industry, there will be very significant time and costs incurred in order to generate the data necessary to comply with the sensitivity analysis requirement. It is hard to imagine these extra efforts being completed in time to be included in a Form 10-K whose deadline has been "accelerated" to 60 days from year-end. The notion of "compounding effects" of the Commission's other concurrent rulemaking proposals is a reality to the insurance and other industries.

To illustrate how the proposal might conflict with existing GAAP for insurance accounting, FAS 60 requires significant estimates to be made at the inception of a long duration contract in the recording of policyholder benefit reserves. These assumptions include mortality, maintenance, interest and withdrawal expectations. These assumptions, however, are locked in after inception and not changed unless a premium deficiency is expected. Therefore, while these significant assumptions are already disclosed, sensitivity analysis seems hard to justify when GAAP does not allow them to change and the related registrant insurance information systems are not built to calculate the effect of changing.

Foreign Private Issuers

Beginning with our response to question #63 in the attachment to this letter, we have addressed a series of matters pertaining to foreign private issuers. Please refer to that section for our comments and recommendations.

* * * * *

In the attachment to this letter, we have expressed our views on the specific questions that appear in the Release. Our responses should be considered in conjunction with the general comments expressed above.

We appreciate the opportunity to express our views and would be pleased to discuss our comments or answer any questions that the staff may have. Please do not hesitate to contact Jay Hartig (973-236-7248) regarding our submission.

Sincerely,

PricewaterhouseCoopers LLP

1. Should we require additional MD&A disclosure specifically regarding the effects of a change by a company from one accounting policy to another acceptable (and preferable) accounting policy under GAAP?

No. The current requirements of APB Opinion No. 20 are sufficient in our view, provided they are followed diligently and monitored through the SEC comment process.

2. Should we require in MD&A a discussion of the impact that alternative accounting policies acceptable under GAAP would have had on a company's financial statements even when a company did not choose to apply the alternatives?

No. To do so would only create a menu of possible adjustments and result in the creation of multiple alternate measures of performance. The SEC should not create rules that result in what are de facto pro forma earnings disclosures.

3. What costs would companies incur if they had to prepare disclosure about the effects of alternative accounting policies that could have been chosen but were not?

The question is not one of the cost of preparation, but the cost in terms of lost investor understanding of reports that are becoming ever more incomprehensible.

4. Beyond a company's initial adoption of those policies, should we require disclosure in MD&A regarding a company's reasons for choosing, and the effects of applying, accounting policies used for unusual or innovative transactions or in emerging areas? Similarly, should we require companies to disclose in MD&A the effects of accounting policies that a company could have adopted, but did not adopt, for unusual or innovative transactions or in emerging areas?

We believe that creating such alternative disclosures and discussions undermines the concepts of APB 20 and invites the creation of corresponding alternate income measures to go along with the array of alternative principles. We believe this would pose more of a risk of abuse than the disclosure is worth.

5. Should we require more disclosure by companies about their process of making estimates, or in other areas of discretion relating to recognition and measurement in financial statements? If so, please describe in detail.

We would encourage one or more SABs or FRP sections elaborating on the SEC's views of the meaning of APB 22, SoP 94-6 and APB 20, in the context of investor protection, to be used in administering the comment process, rather than imposition of disclosures applied broadly to many companies whose accounting is, in the final analysis, unremarkable.

6. Should we require in MD&A a discussion of the impact of a company's choice among accounting methods under GAAP that are used in the company's industry (for example, the completed contract and the percentage of completion methods of accounting for construction-type contract)? Should we require that type of disclosure only where a company uses a method under GAAP that is not generally used by other companies in the industry?

No. The definition(s) are unclear. The terms "highly uncertain", the standards for what could "reasonably" have been used and the impact on "financial presentation" (as opposed to a generally understood measure of significance related to the results of the business taken as a whole, similar to Regulation S-X Rule 1-02) all create an air of uncertainty as to how to apply the rule. In addition, they leave the door open to criticism in subsequent accounting periods should estimates vary. Without an adequate definitional framework for "defense", preparers could become subject to unnecessary litigation.

9. Is the definition [of critical accounting estimates] appropriately designed to identify the accounting estimates that require management to use significant judgment or that are the most uncertain? If not, what other aspects descriptive of that type of estimate should be included?

A quantitative test of specific (standard) financial statement measures based on the significance tests of Regulation S-X Rule 1-02 should be designed and exposed in an amended rule proposal.

10. Is the definition appropriately designed to identify the accounting estimates involving a high potential to result in a material impact on the company's financial presentation?

No. See response to #7 above.

11. Would it be difficult for a company to discern which of its accounting estimates require assumptions about highly uncertain matters? If so, how could the proposal better target them?

See response to #7 above.

12. Should we consider setting a minimum percentage impact on results of operations in the second criterion of the definition, or would that be unnecessary because the proposed definition would not capture changes that have an insignificant impact?

We believe that there will be a voluminous response to this criterion. Registrants will likely attempt to protect themselves by including greater volume of descriptive comments, possibly accompanied by ample doses of boilerplate. A minimum quantitative test based on standard financial statement measures might help in this regard.

13. How many accounting estimates would a company typically identify as critical accounting estimates under the proposed definition?

There is no way to discern the answer to this question, except to say that it is artificial to limit the number of critical estimates to be discussed when segment materiality is introduced as a benchmark and when the legal liability risks of the rule appear to be so high.

14. Would a company with multiple segments have a greater number of critical accounting estimates than a company without multiple segments? If so, please provide an explanation.

The definition of materiality established by the SEC in SAB 99 and through the WR Grace enforcement release have caused registrants, their auditors and the plaintiffs bar to believe that omitted information at the segment level is likely to be actionable. A registrant seeking to protect itself would probably conclude that more than one estimate per segment should be included, just to gain a minimal reduction in litigation/Enforcement risk.

15. Should we establish a maximum number of accounting estimates that may be discussed as critical accounting estimates (e.g., seven)? If so, what should the maximum number be and what criteria should be applied to set the number so as to strike the appropriate balance between information truly useful to investors and overly extensive disclosure of marginal use? If a maximum were set, should the number of segments a company has be considered?

No. See response to #14 above.

16. Should we expand the definition to include MD&A disclosure of volatile accounting estimates that use complex methodologies but do not involve significant management judgment? Should we do so only when the underlying assumptions or methodologies of those estimates are not commonly used and therefore not understood by investors?

No. Such information is already called for by GAAP and by FR-61. The proposal already promises to massively increase the volume of MD&A to the point that the SEC itself has had to ask for public comment about the need for an executive summary.

17. Are there some types of critical accounting estimates or some circumstances where the proposed disclosure relating to sensitivity would not be meaningful or otherwise helpful to investors? If so, which estimates or what circumstances?

There are number of estimates already covered by GAAP standards for which the FASB had ample opportunity to specify the disclosure requirements. To effectively further "amend" the FASB standards through an MD&A release is not appropriate in our estimation.

18. In addition to the two choices we propose for assuming changes relating to the critical accounting estimates to analyze sensitivity, are there others that we should permit? Should we require instead that all companies use the same method? If so, which one?

The SEC can and should extend the concept of disclosure of a known but uncertain event or trend already included in Regulation S-K Item 303 more directly to accounting policy disclosures called for under APB Opinions No. 20 and 22 and to SoP 94-6. In other words, such disclosure would deal only with describing the potential for prospective changes in (critical) estimates in the footnotes, and would continue to confine elective forward-looking statements to the MD&A section of report.

19. Should we require a company to use whichever of the two proposed choices demonstrates the greatest impact on the company's financial presentation?

No. Requiring the greatest impact to be disclosed lessens the value of the disclosure and unnecessarily sensationalizes the fact that, to begin with, the item is an estimate, with a whole range of possible outcomes.

20. Are there circumstances under which a company should be required to demonstrate sensitivity using both of the proposed choices?

No. Sensitivity analysis itself is problematic. Creating more estimates is not the solution and detracts from reader comprehension of data that is important. See also our response to #19 above.

21. Are there any critical accounting estimates for which neither of the two choices for selecting the assumed changes would be appropriate?

See response to #19 above.

22. Will companies be able to select appropriate changes in their most material assumption or assumptions, or should we provide further guidance?

Many accounting estimates involve the use of multiple assumptions that interact with one another. If, individually, the assumptions are relatively benign, but the estimate could become volatile if all varied in a particular direction, there would be a natural tendency on the part of preparers to mention all of them in order to limit their SEC and legal exposure. This will contribute (negatively) to the volume of MD&A.

23. To enhance an investors' ability to compare the sensitivity of various companies' financial statements to changes relating to a particular type of accounting estimate, should we standardize the changes that companies must assume for various types of estimates? If so, what should they be and why? For example, should we set a specified percentage increase and decrease to assume (e.g., a 10% increase and decrease), or a presumptive increase and decrease, provided that degree of change is reasonably possible in the near term?

The purpose of MD&A has been, and should continue to be, to enable investors to see the company through the eyes of management. Application of standardized sensitivity criteria is antithetical to that principle.

24. Conversely, would any changes we standardize not be equally meaningful to measure sensitivity, or equally probable, for various accounting estimates, industries and companies, and thus reduce the value of any disclosure about sensitivity?

See response to #23 above.

25. Is sufficient disclosure of these changes already required under current MD&A requirements?

We believe that, to the extent the SEC believes current day disclosures have not met the spirit of the rules, the combination of the CorpFin comment process and relatively minor amendments to the MD&A rules effected through SABs or FRPs can materially improve it.

26. Is a three-year period the most appropriate period of time over which investors should consider changes? If not, why would a shorter or longer period be more appropriate?

For the reasons noted in our letter a "look-back" should not be required at all.

27. Would requiring disclosure over a longer period, such as five years, make it easier for investors to identify trends? If so, over how many years should we phase in a longer period requirement?

See response to #26 above and the text of our letter.

28. Should we mandate a standardized format for quantitative disclosure about past changes in critical accounting estimates (e.g., a chart illustrating the dollar value of the change from the prior year for each year showing the impacted line items and other effects in each year)?

No. See response to #23 above.

29. To what extent does senior management currently discuss critical accounting estimates with the audit committee of the board of directors and the company's auditors?

There is no uniform depth of discussion in our experience. Audit Committees' levels of interest in, and managements' interest in increasing the Committee's involvement in, "accounting details" ranges from highly proactive to moderate. However, current events and governance change proposals put forth by the NYSE and others have increased registrant and director awareness of the need to improve such communications and to increase their granularity.

In this regard, the major accounting firms are also currently very active in helping improve audit committee communications and heightening Director awareness of the impacts of technical accounting matters on the company as a part of fulfilling their SAS 61 responsibilities.

30. Would the proposed requirement {to disclose the extent of discussions with the audit committee as described in S-K 303(c)(3)(iv)} provide useful information to investors?

Such a requirement if implemented at all should be installed with a built-in "sunset review" provision. If the evolutionary changes and other "incentives" currently under discussion at the SEC and in Congress prove effective, the relative importance of this disclosure should decrease rapidly.

31. Would the proposed disclosure be a catalyst for discussion between audit committees and senior management? Could it chill discussions?

This will depend in large part on the nature of the advice rendered by the legal profession to their SEC registrant clients. To the extent that the release leaves questions about the extent of required disclosure on the issues or of the discussions, legal advice could become conservative to the point of chilling the dialogue. We believe that possibility could be reduced or avoided by bringing greater clarity to the definitions included in the proposals.

32. Is there other related disclosure that should be required for the benefit of investors?

No, not at present. The task at hand is to achieve quality of reported data and improved understandability, not to increase MD&A's volume gratuitously.

33. Should we require that companies disclose any unresolved concerns of the audit committee about the critical accounting estimates or the related MD&A disclosure?

By the time any public disclosure is made, there should be no unresolved concerns or the disclosure should be held back until the parties achieve a meeting of the minds.

34. Should we require disclosure of any specific procedures employed by the audit committee to ensure that the company's response to the proposed disclosure requirements is complete and fair?

No. Specific disclosures should not be required. If made, in our view, they would be highly susceptible to hyperbole in describing their effectiveness.

35. Should we consider requiring disclosure of whether the audit committee recommends the disclosure be included in the MD&A, which is akin to the disclosure required in the Item 306 audit committee report?

No. The "release" of the financial statements, taken as a whole, for use in the Annual Report under S-K 306(a)(4) is qualitatively far different, and more significant, than the inclusion of the detailed accounting information contemplated by the proposed rule.

36. Instead of the proposed disclosure, should we amend Item 306 of Regulation S-K and Regulation S-B to require that the audit committee report disclose whether the audit committee has reviewed and discussed with senior management the development, selection and disclosure regarding critical accounting estimates?

That change alone, without all the detailed disclosures proposed, would be sufficient and indeed preferable in our view.

37. If we were to amend Items 306 in this manner, should we also expand them to include the discussions about critical accounting estimates between senior management and the audit committee as one of the bases for the audit committee's recommendation to include the financial statements in the annual report?

No one factor should be singled out as supporting the inclusion of the financial statements in the Annual Report. The judgments involved are much broader than evaluating just one aspect of MD&A disclosure.

38. Should we expand Items 306 to require disclosure of whether, based on an audit committee's review of and discussions about the MD&A, the audit committee recommended to the board of directors that the MD&A be included in the company's annual report?

While this disclosure sounds on its face to be reasonable, many legal advisors adhere to a strict, literal legal separation of the Audit Committee from management, a distinction this segment of the proposed rule seeks to blur. Those advisors will in all likelihood be offended by the proposal and would assert that the audit committee members can never be in a position to know as much as management about the disclosures in financial statements or MD&A to support such a recommendation.

39. Should we expand Items 306 to require disclosure of whether the audit committee has reviewed and discussed the entire MD&A disclosure (current and proposed) with management and/or the auditors?

It is not unreasonable for the Audit Committee to confirm that the auditor has fulfilled his or her SAS 8 responsibility, but in our view that one step does not rise to the level of essential public disclosure that in any way significantly enhances investor protection.

40. If any of a company's accounting policies diverge, to its knowledge, from the policies predominately applied by other companies in the same industry, should we require that the company disclose, possibly in connection with the audit committee report, whether the audit committee has had discussions with senior management about the appropriateness of the accounting policies being used? When such discussions have taken place, should we require that the company disclose the audit committee's unresolved concerns about the divergent accounting policies being applied? Prior to the adoption of our proposals, to what extent would a company know that its accounting policies diverge from those of other companies in its industry?

A one-time reaffirmation may be useful, but the point should be that there are to be no "unresolved concerns" prior to publication, in which case description of the preceding events is unnecessary.

41. Should we provide more guidance for determining the circumstances that warrant segment disclosure?

Yes, especially in light of the explicit statements regarding segment-based materiality measures contained in SAB 99 and included in recent Enforcement cases.

42. Should we require the additional segment discussion only when more than one segment is affected?

This would be difficult to justify. At present companies are not required to prepare MD&A based on segments. It would not be appropriate to discuss estimates (by segment) on a basis different than the entirety of the company.

43. Should we require that the critical accounting estimates disclosure in the MD&A undergo an auditor examination comparable to that enumerated in AT §701?

We believe auditor involvement in MD&A can be a valuable service. However, we also note that there currently exists no professional standard that permits reporting on only a portion of MD&A. Footnote 104 of the proposed rule citing over fifty examples of public MD&A reports is not accurate. Of the eleven examples of alleged AT 701 reporting by our firm the actual number was zero public reports and one non-public report issued to the Board only. (The other citations of the two instances of reporting, one in an IPO and one pursuant to a Registrant's Enforcement settlement are accurate.)

44. Would these engagements significantly improve the disclosure provided in MD&A?

We are unsure of the extent to which quality would improve, but recognize that the presence of an outside reviewer may be useful in stimulating compliance with existing MD&A rules. These additional attestation services would materially increase the overall cost of audit.

45. In practice, when companies engage auditors to examine the MD&A pursuant to AT §701, does it elicit a higher quality of disclosure than when auditors consider only, as currently required, whether an MD&A is materially inconsistent with the financial statements?

Neither the SEC nor we can assess this question, since AT 701 reporting is currently a rarity.

46. If we were to require examinations by auditors of part or all of MD&A disclosures, should we also require that a company file, or disclose the results of, the auditor's reports?

If the reports are to be required, we believe the benefits of improved compliance could be achieved without public filing.

47. If we do not require auditors' examinations of MD&A disclosure but an auditor nonetheless examines MD&A disclosure on critical accounting estimates, should we require that the auditor's report be filed or the results be disclosed?

No. See our responses to #43-#46 above.

48. What would be the relative benefits and costs of a requirement for an auditor examination with respect to the critical accounting estimates portion of the MD&A?

As indicated above, based on the rarity of reporting, it appears that the marketplace currently believes the costs outweigh the benefits.

49. Should we require an auditor "review" under standards comparable to AT §701,as opposed to an auditor "examination" of the critical accounting estimates MD&A disclosure?

No. If services are to be mandated, then they should be more substantive than current review standards and should embrace the entirety of MD&A.

50. Do current requirements relating to what an auditor must consider make an examination or review of the proposed MD&A disclosure under standards comparable to AT §701 unnecessary?

SAS 8 responsibilities differ from and are far less than AT 701 procedures.

51. If we do not require auditor examination or review, are there other steps we should take to help ensure the quality of disclosure in this proposed section of MD&A?

Other recent and pending rule changes which include certification requirements seem to have provided a number of the necessary "incentives" for management to be more rigorous in their preparation of MD&A.

52. Are there some accounting estimates or material assumptions or methodologies that would normally be considered by companies only on a less frequent basis than quarterly? If so, which ones? Should they be omitted from the quarterly updating requirement on that basis?

There are many in the areas of employee pensions and other benefits as well as many in the insurance industry, which would be particularly impacted by the proposed rule and which are only subject to updating on an irregular basis. It would be more valuable to readers to understand the ground rules for updating and the management processes followed to consider estimates that are central to operating results than to delve into the details of 3-5 estimates that may or may not be drivers of the registrant's business.

53. Is the scope of the disclosure required in a quarterly update appropriate? If not, what should be added or omitted?

It appears that the disclosures elicited may already be required by other SEC rules or GAAP.

54. Would the proposed disclosures about initial adoption of accounting policies provide useful information to investors and other readers of financial reports?

No. They are largely duplicative of GAAP and create the impression that there is a wide array of options to select from, thus undermining the justification concept of APB 20 and generating multiple-outcome scenarios.

55. Are there particular situations involving the initial adoption of a material accounting policy for which we should require additional disclosure? If so, what are those situations and what additional disclosure should we require?

GAAP provides for most of the required disclosures. If the SEC is unhappy with GAAP compliance, we would support issuance of a SAB and enforcement of APB 20 more stringently through the comment process.

56. Should we require companies to disclose, in MD&A or in the financial statements, the estimated effect of adopting accounting policies that they could have adopted, but did not adopt, upon initial accounting for unusual or novel transactions?

Unusual or novel transactions are not clearly defined in GAAP or SEC rules. Therefore, we cannot support or imagine how anyone could comply with an SEC rule without a framework, directed at an unspecified target area. We note that in APB 22, there is the available context of that entire standard as well as the framework of GAAS and materiality to guide preparers and auditors. However, the SEC's rule lacks such points of reference and subjects such parties to unknown, but potentially severe, penalties for violation.

57. What would be the costs for companies to prepare disclosure about the effects of alternative accounting policies that could have been chosen but were not?

Multiple calculations can always be performed at some monetary cost. The question should be directed at what companies stand to lose in credibility and investor focus on important matters by such disclosures.

58. Would investors be confused if companies presented disclosure of the effects of acceptable alternative policies that were not chosen?

Yes.

59. Should we require in MD&A a discussion of whether the accounting policies followed by a company upon initial adoption differ from the accounting policies applied, in similar circumstances, by other companies in its industry, and the reasons for those differences? Please explain. If such a discussion should be required, please identify the specific disclosures companies should make.

No. See the full text of our comment letter.

60. Would a company know the policies applied in similar circumstances by other companies in its industry? If not, would auditing firms or other financial advisors be able to assist companies in determining whether their accounting policies generally diverge from industry practices?

No. Professionals are in most cases precluded from divulging one client's data to another. Surveys of public data might not be sufficiently precise due to variances in business conditions and descriptions.

61. Should the proposed disclosure be presented in a separate section of MD&A or should we require that it be integrated into the other discussions of financial condition, changes in financial condition, results of operations and liquidity and capital resources when the proposed disclosure is closely related to an aspect discussed in those separate sections of MD&A?

Yes. To allow a reader to avoid what promises to be fairly tedious disclosure a separate section should be created.

62. Should other requirements relating to the language and format be added to the requirement for clear, concise and understandable disclosure? If so, what requirements?

We believe, for the reasons stated in our letter, that the rule proposal is likely to produce a result diametrically opposite to clarity and conciseness. Installing such language would be ineffective at preventing this result.

63. Should we apply different standards for foreign private issuers with respect to the proposed MD&A disclosure?

To the extent that there are changes that are adopted, we believe they should be equally applicable to foreign private issuers as domestic issuers. However, there is no question, for the reasons noted in the proposing release there can be differences in the accounting standards which could result in double the disclosure on critical accounting policies that a US company needs to provide - one for the GAAP in the primary financial statements and the other for US GAAP. We believe that this places an unfair burden on foreign private issuers and would result in the discussion of accounting polices in an Operating and Financial Review ("OFR") overwhelming the rest of the discussion. Many foreign private issues disclose in their annual reports the same, or a very similar OFR as is filed with the SEC. This is usually because their home country has requirements that are conceptually similar to that of the Commission.

However, we believe many of these companies will elect to exclude such information from their annual report to shareholders as they will see the cost of printing, etc. as outweighing the benefits because under the proposed rule there will be no similar requirement in their home jurisdiction. While the MD&A disclosures generally focus on the primary financial statements, to reduce the burden, we recommend that foreign private issuers have the option of presenting the information only in accordance with US GAAP. This would be a logical conclusion as the disclosure is only for the benefit of US investors.

To the extent that foreign private issuers are required to provide this information, they should only be required to update the information on an interim basis in a registration statement in which they are required or elect to present US GAAP information. Historically, it is the presentation of US GAAP information in a registration statement that triggers the need to update other information such as OFR, Industry Guide data, etc. Other than that, any additional requirement would constitute a fundamental change in the way that foreign private issuers are required to provide information into the US market.

The concept of meeting with audit committees and reviewing with them the information that is required by SAS 61, 89 and 90 is new in many parts of the world. As the composition of audit committees, frequency of meeting, topics discussed is frequently different in foreign countries compared to the US, we do not believe that foreign private issuers should be required to disclose if these issues have been discussed with the audit committee.

64. Are there specific items of the proposed disclosure that would be less appropriate for foreign private issuers? If so, what should substitute for that disclosure?

See the text of #63 above for comments on Foreign Private Issuers and their unique situation under the proposed rule.

65. Should we consider applying an updating requirement to the proposed critical accounting estimates disclosure for foreign private issuers that do not file quarterly reports? If so, what should trigger that updating requirement?

See the text of comment #63 above for comments on Foreign Private Issuers and their unique situation under the proposed rule.

66. Are there reasons to distinguish this aspect of MD&A disclosure when foreign private issuers otherwise may not prepare MD&A-equivalent disclosure on a quarterly basis?

See the text of comment #63 above for comments on Foreign Private Issuers and their unique situation under the proposed rule.

67. Should we require the proposed MD&A disclosure for small business issuers with no recent revenues even though MD&A disclosure by them is otherwise not required? If so, why?

If the Commission considers the information elicited by the rule to be valuable, then there is no reason to have differing requirements for SB filers, other than to accommodate the different number of years for which disclosure is provided. Investors' informational needs do not vary directly according to the market capitalization or revenue levels of the companies in which they invest.

68. Are there modifications or simplifications to the proposed disclosure requirements that we could make, consistent with our ongoing simplification and reduction of burden for small business issuers that still would achieve the goal of providing investors with an adequate understanding of the implications of management's critical accounting estimates and its initial adoption of accounting policies with a material impact?

See our response to #67 above.

69. Should we create an exemption from the quarterly updating, or simplify it, for small business issuers?

See our response to #67 above.

70. Is there any need for further guidance from the Commission with respect to the application of either the statutory or rule safe harbors?

Safe harbors only work effectively with respect to Federal or Commission actions. Registrant risk is elevated by civil actions from the plaintiffs bar. The only way to really protect registrants is to eliminate the three-year look back provision and pick up any new analysis under the proposal on a going forward basis (i.e., more like the SAB 101 implementation model).

71. Is the additional information elicited by the proposals useful to investors, other users of company disclosure and readers of a company's financial statements? If not, how can it be improved to achieve that goal?

No. The data will be voluminous and, with respect to the average reader, confusing at best, misleading at worst.

72. In addition to the requirements we propose, are there particular aspects of critical accounting estimates or their development or impact that the proposals should specifically require companies to address? If so, what are they?

See the full text of our letter. Insight into estimation processes related to key drivers of the results of the business would be far more valuable than dwelling on details of particular estimates.

73. In addition to the requirements we propose, are there particular aspects concerning a company's initial adoption of an accounting policy that the proposals should specifically require companies to address? If so, what are they?

No. APB 20 should be adequate if properly enforced and supplemented by an SAB expressing the Staff's views.

74. Is disclosure necessary concerning the procedures that management follows in selecting its critical accounting estimates? If so, what additional disclosure should be provided?

We believe this should become a primary focus area. We believe additional information as to the management processes utilized to arrive at an appropriate accounting policy will be more useful to investors than a display of the options that were not selected, or comparisons to other peer companies whose situations differ from the registrant's.

75. Is additional disclosure or regulation necessary or appropriate concerning the role of the audit committee in discussing the critical accounting estimates and the disclosure about them that management drafts?

We believe that other pending SEC and SRO proposal will adequately address this area without modifying the requirements of MD&A.

76. In addition to the proposed disclosure, should we adopt a specific requirement that a company must provide any other information that is needed to make the proposed disclosure reflective of management's view of the critical accounting estimates and the initially adopted policies being discussed?

No. See our response to #74 above.

77. For critical accounting estimates of fair value, should we mandate the example in FR-61as part of these rules? If yes, do other areas exist for which that type of detailed disclosure would be appropriate?

The SEC should take the steps needed to elevate the stature of FR-61 from cautionary advice to "rule" if it believes the disclosures are worth making. We supported the concepts of FR-61 and have always believed in its potential value.

78. If the proposed disclosure would involve competitive or other sensitive information, are there any mechanisms that would ensure full and accurate disclosure while reducing a company's risk of competitive harm?

See the full text of our response letter regarding tax and other accruals.

79. Are there some aspects of the proposed disclosure that should be retained while eliminating other parts of the proposed disclosure? We solicit comment on the desirability of adopting some sections of the proposed rules, but not all sections.

The comments of the public should be considered and a re-exposure plan adopted.

80. Is there evidence that market forces would elicit the disclosures we are proposing?

Current market conditions seem to amply demonstrate that opacity is no longer rewarded.

81. What are the relative costs and benefits of pursuing these or other alternative regulatory solutions to elicit disclosure of the application of critical accounting policies?

We are not in a position to provide such data, but believe any benefits, beyond those achieved by complying with existing rules, to be minimal, while the costs of compliance will be material.

82. We solicit quantitative data to assist our assessment of the benefits of identifying critical accounting estimates and analyzing their effects on the financial statements and explaining the initial adoption of material accounting policies and their impacts in the manner proposed.

We are not in a position to provide such data, but believe any benefits, beyond those achieved by complying with existing rules, to be minimal, while the costs of compliance will be material.

83. Would the proposed disclosure serve as a deterrent for improper accounting practices?

The SEC's existing rules already serve such deterrent purposes.

84. What types of expenses would companies incur in order to comply with the proposed disclosure requirements?

We are not in a position to provide such data, but believe the costs will be significant.

85. What would the average printing and dissemination costs be for each firm?

We are not in a position to provide such data, but believe the costs will be significant.

86. We solicit quantitative data to assist our assessment of the compliance costs of identifying critical accounting estimates and the initial adoption of accounting policies that have a material impact and analyzing their effects on the financial statements in the manner proposed.

We are not in a position to provide such data, but believe the costs will be significant.

87. To what degree would our proposed disclosure requirements create competitively harmful effects upon public companies?

We believe that damages to registrants could be significant. See the full text of our letter for discussion.

88. How could we minimize those effects?

The effects can be minimized by providing an exclusion for estimates related to tax environmental and other litigation liabilities that have been estimated. We believe that damages to registrants could be significant. See the full text of our letter for discussion.

89. What are the potential litigation and liability costs that would be associated with the proposed disclosure requirements?

These costs will be material. See the full text of our letter which notes that in the current environment almost any incremental disclosure placed on file for any reason, including responding to SEC CorpFin comments, invites the plaintiffs' bar to bring cases alleging reliance on previously filed documents that are now, in retrospect, conveniently judged to have been incomplete at the time of original filing.

90. Would small business issuers on average have fewer critical accounting estimates to discuss?

See our response to #67 above.

91. Who would prepare the disclosure for small business issuers?

See our response to #67 above.

92. What types of expenses would be incurred to prepare this disclosure?

We cannot estimate these cost but they would be significant. Due to the liability issues noted in our letter, they would require thorough legal review prior to filing.

93. On average, would the U.S. GAAP reconciliation cause foreign private issuers to have more critical accounting estimates and more initial adoptions of accounting policies to discuss than a U.S. company? If so, how many more?

As the Staff may have noted under FR-60, these disclosures need to be provided for both the local GAAP and the US-GAAP reconciled amounts. The additional disclosure requirements would be significant. See our response to #63 above in which we recommend that an option to provide data on a US-GAAP basis only be considered for MD&A disclosures across the board.